United Kingdom

Contributed by Catherine Johnson (University of Huddersfield)

January 2019

Key Takeaways

  1. Netflix entered a mature online TV market in the UK, albeit one dominated by free-to-air ad-funded services.

  2. Since Netflix’s UK launch in 2012, subscription funding has rapidly increased, overtaking ad-funding to become the principal contributor to overall online TV revenues in the UK.

  3. Netflix has entered into localized UK production. This has led to fears that increased production costs and an emphasis on transnational markets will cause a decline in programming that addresses the specific needs of UK audiences.

  4. While revenues for subscription online TV continue to grow, revenues from cable/satellite pay television declined for the first time in 2017. However, subscriber estimates suggest that many viewers take out a Netflix subscription in addition to, rather than as a replacement for, their cable/satellite TV service.

Market

When Netflix launched in the UK (and Ireland) on 9 January 2012, it entered into a mature and competitive online TV market. The UK TV industry had long been dominated by four free-to-air terrestrial broadcasters (BBC, ITV, Channel 4 and Channel 5) that provided a slate of digital channels (digital switchover was completed in 2012). These operated alongside a pay-TV market dominated by Sky (offering satellite) and Virgin (offering cable). Both Sky and Virgin provided triple and quadruple pay deals where subscribers typically signed up for 12-18 month subscriptions to packages that bundled television channels, internet and landline (and sometimes also mobile).

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By 2012 both the free-to-air and the pay-TV cable/satellite television providers had entered into the online TV market. The commercially-funded UK public service broadcaster, Channel 4, launched the UK’s first online TV service, 4 On-Demand (4OD), in November 2006. 4OD offered access to Channel 4 programmes broadcast over the previous 30 days, as well as selected archive content. Over the next two years all of the UK’s free-to-air broadcasters launched similar so-called ‘catch-up’ services. The BBC and ITV launched iPlayer and ITV Catch-Up (later re-branded as ITV Player and then ITV Hub) respectively in 2007, and in 2008 Channel 5 launched 5 On Demand (later re-branded as My5). With the exception of BBC iPlayer, which was available free without advertising, all of these services were available for free supported by advertising. Where the free-to-air broadcasters focused on offering a range of programming with an emphasis on UK productions, Sky had positioned itself as the home of high-quality US television and film in the UK. Its Sky Movies channels were promoted as the place to watch the most recent Hollywood releases first, and in 2010 Sky signed a deal with HBO which was to make is premium channel, Sky Atlantic, the exclusive home of HBO content in the UK. Sky and Virgin Media followed the free-to-air broadcasters into the on-demand market with Sky launching Sky Player in 2008, which enabled subscribers to its satellite TV service to access content on-demand. In July 2011 Sky Player was merged with Sky Mobile TV and re-branded as Sky Go, extending the range of devices on which Sky content could be watched on demand. Sky’s primary rival, Virgin Media, had initially moved into on-demand television by offering access to BBC iPlayer through its set-top boxes in 2008, and launched its own on-demand service (Virgin Media Player) in 2010. Sky Go and Virgin Media Player were both included as part of the TV subscription package offered by Sky and Virgin respectively.

By January 2012, 37% of UK adults with home internet watched online catch-up television and BBC iPlayer reported record-breaking usage, with 1.94 billion TV and radio programmes requested through the service across all devices (PCs, internet-connected televisions, smartphones and tablets) in 2011. When Netflix launched in the UK, therefore, it joined a vibrant market where viewers were used to being able to access free and subscription online TV services across multiple devices.

However, despite the maturity of the UK online TV market in 2012, Netflix faced little competition in the provision of over-the-top (OTT) services available for a monthly subscription, its only rival being Lovefilm. Lovefilm had launched in 2004 as a UK DVD by post service, premiering the UK’s first mass market movie download service in 2005, which was rolled out on Sony and Samsung internet-enabled TV sets in 2010. Lovefilm was bought by Amazon in 2011, which launched a new online streaming only package, Lovefilm Instant in December 2011. However, Lovefilm was still primarily known for its DVD delivery service when Netflix launched in January 2012. Indeed, at launch Reed Hastings (Netflix CEO) claimed that Sky, rather than Lovefilm or the free-to-air broadcasters, was Netflix’s main competitor in the UK.

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Although Netflix entered into an online TV market demonstrating significant and rapid growth, this was primarily in ad-funded services. Revenue from online TV in the UK had increased from £11m in 2006 to £229m in 2011, growing 51% in 2011 alone. However, the majority of this growth in online TV revenues came from the £134m income generated by free-to-view ad-funded services (ITV Player, 4OD and Demand 5). By contrast, in the same year pay-per-view (PPV) and subscription revenues for online TV grew by 13% and 14% respectively, with subscription amounting to only 23.3m of revenue in 2011 (Ofcom 2012: 151). However, following Netflix’s launch, the UK market witnessed significant growth in online TV subscription revenues, which had more than doubled to 62m by the second half of 2012, largely driven by revenues from subscription OTT services (Ofcom 2013: 159).

Netflix’s subscription-funded competitors responded quickly to its arrival in the UK. Lovefilm signed content deals with the BBC, ITV and Sony for its streaming service Lovefilm Instant. Sky launched its own OTT online TV service, Now TV, in July 2012 offering access to Sky’s TV and movie content without the requirement to subscribe to its satellite TV service. Now TV offered a range of packages, with some content available on a PPV basis and others through premium monthly subscriptions, such as movies. In 2014, Amazon rolled Lovefilm Instant into Amazon Prime, enabling subscribers to its premium delivery services to also gain access to its catalogue of audiovisual content to stream and download.

By 2014, Ofcom (2015: 148) was reporting that increases in TV revenue were being driven by rises in subscription revenues, rather than advertising. Ofcom noted particularly steep rises in overall online TV revenue, increasing from £50m in 2008 to £793 in 2014. Of this figure, subscription revenue accounted for £317m (40%), overtaking ad-funding to become the principal contributor to overall online TV revenues. Over the decade subscriptions to OTT on-demand services continued to grow. By 2018 40% of UK households subscribed to Netflix, Amazon Prime or Now TV, while revenues from subscription cable/satellite pay TV declined for the first time (Ofcom 2018: 28).

Viewing Habits

The changing market for online TV in the UK is reflected in shifting viewing habits. Just before Netflix launched in 2011 UK audiences watched an average of 4 hours of broadcast TV per day and this figure had remained stable for a number of years. The main public service broadcasters (BBC, ITV and Channel 4) and their portfolio of channels attracted 73.5% of viewing in multichannel homes. 47% of viewers had a DVR, with timeshifting relatively stable at 15% of all viewing. Of those homes with internet, 37% watch online TV, with 16-24 year-olds most likely to do so (Ofcom 2012: 153). However, even after Netflix’s launch, free catch-up services (such as iPlayer and 4OD) were used far more than subscription services like Netflix. In 2013, 40% of UK viewers claimed to watch TV programmes via catch-up services like iPlayer or 4OD, while only 16% claimed to use subscription video-on-demand (VOD) services like Netflix and Lovefilm Instant (Ofcom 2013: 137).

In addition to the launch of subscription OTT services, like Netflix, increased consumption of online TV has also been driven by uptake of internet-connected devices. Between 2008 and 2018, the UK saw significant increase in ownership of smart TVs (up from 5% to 42%), smartphones (up from 17% to 78%) and tablets (up from 2% to 58%) (Ofcom 2018: 24). By 2018 more than half of UK households had a TV set connected to the internet and subscription VOD services like Netflix were in a third of UK households. These changes were accompanied by a decline in viewing of broadcast TV (live or within 7 days of broadcast), down to an average of 3 hours and 23 mins a day in 2017. The steepest declines were amongst children and young adults. Children’s viewing declined by 15% in 2017 to 1 hour 24 mins, and 16-24s by 12% to an average of 1 hour 40 mins (Ofcom 2018: 29). The rise of online TV viewing was supported by, and helped to drive uptake of, superfast broadband, which was in around half of UK households by 2018, when watching online video was the main driver of fixed line data use (Ofcom 2018: 21).

Regulation

In the UK, television is regulated by the independent telecommunications regulator, Ofcom. From 1 January 2016, Ofcom have been responsible for regulating the editorial content (programming) of all UK VOD services, defined as those that offer ‘TV catch-up, online film services and a library of archive content’. Ofcom has five criteria for defining an on-demand programme service (ODPS), broadly understood as those services that compete with linear TV that users would expect to be subject to a degree of regulatory protection. To be designated an ODPS and come under Ofcom regulation, a service must be:

  1. Primarily focused on the provision of TV-like programmes (e.g. long-form content normally included in TV services)

  2. Accessed on-demand

  3. Editorially responsibility for its content

  4. Publicly available

  5. Under the jurisdiction of the UK.

All such online TV services must protect under-18s by ensuring that material that might ‘seriously impair the physical, mental or moral development of under-18s’ is not easily accessible to this age group. Regulation also requires that they do not contain material likely to incite hatred (based on race, sex, religion or nationality) and that they comply with rules concerning product placement and sponsorship. In addition, any advertising must be easily recognisable, must not encourage risky behaviour, and cannot promote tobacco products, prescription medicines or medical treatments (Ofcom 2016).

Although, Amazon Prime Video is regulated by Ofcom, Netflix is beyond Ofcom’s regulatory remit because it is outside of the jurisdiction of the UK, which is determined according to factors such as the location of the head office, where editorial decisions are made and where the workforce is located. However, because it does fall within the jurisdiction of the Netherlands, Netflix has to abide by the terms of the European Union’s Audiovisual Media Services Directive (AVMSD). On 6 November 2018 the European Council adopted a revised AVMSD adapted to the contemporary media landscape, which included improving protection for minors and protections against incitement to hatred for on-demand services, increasing obligations for VOD services to contain 30% of European content in their catalogues and to promote European works, and strengthening provisions to ensure the separation of advertising and editorial content.

Internet Pricing and Availability

Internet take-up in the UK increased from 76% in 2011 to 87% in 2018 (Ofcom 2018: 23). In 2019 Cable.co.uk claimed that fixed broadband in the UK cost an average of US$39.58 a month (approximately £30) or US$1.19 per megabit of speed (approximately 90p). Meanwhile, 4G was available to over 80% of the UK by 2018.

As of 2019 Netflix’s packages are priced on accessibility. Its basic membership package is £5.99 per month, but only allows viewing on one device at a time in standard definition. For £7.99 per month viewers can watch in HD and on two devices at one time. For £9.99 per month viewers can watch in Ultra HD and on four devices at one time. Amazon, by contrast, bundles Prime Video subscriptions into its Amazon Prime membership, offering unlimited one-day delivery, ad-free music streaming and photo storage for £79 per year, or £7.99 per month. Meanwhile, Now TV differentiates its packages according to the kind of content provided. Its TV and sports packages are available for £7.99 per month each. Its movie package costs £9.99 per month, while its kids and reality TV packages are both £3.99 per month. These subscription services continue to compete with the on-demand services provided by Sky and Virgin to subscribers to their cable/satellite TV services and the free-to-air online TV services offered by the terrestrial broadcasters.

Content

When it launched in 2012, Netflix signed UK-specific content deals with BBC Worldwide (the BBC’s commercial arm), Lionsgate UK and MGM films, in order to shore up the British content within its catalogue and ensure it had sufficient content licensed for the UK. It included back catalogues of popular shows from UK broadcasters, such as Top Gear (BBC), The Only Way is Essex (ITV), The Inbetweeners (Channel 4), Torchwood (BBC) and Spooks (BBC). However, its catalogue primarily consisted of US content. It has since moved into more localized production, most notably with The Crown, written by UK screenwriter Peter Morgan and featuring a plethora of British acting talent. The Independent newspaper described The Crown, with its exploration of the history of the reign of Queen Elizabeth II, as a ‘thoroughly British affair’. However, in focusing on the British royal family, The Crown functions as a decidedly transnational series, with built-in appeal to international audiences.

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The UK free-to-air online TV services have also moved into creating online-exclusive programming. In 2015 all of the major free-to-air broadcasters re-launched their online TV services as more than just catch-up services. ITV placed particular emphasis on the ability to watch live, BBC emphasised original online content, and Channel 4 pushed its back catalogue of archive content and its exclusive online-only foreign dramas (Johnson 2017). In 2018, the BBC announced its intention to extend the amount of time that content remained on iPlayer from 30 days to at least 12 months in a move designed to compete with Netflix’s strategy of securing longer or even exclusive rights to catalogues of content.

Netflix’s move into original content production has led to fears about rising production costs in the UK. Netflix (and Amazon) pay far more for drama content per episode than the UK’s public service broadcasters (PSBs). Cost per hour of new UK drama across the PSB channels was £769k in 2017. Netflix was reported to have spent £97m on The Crown alone, which would work out at £5m per hour (Ofcom 2018: 33). PSBs have mitigated these rising costs by entering into co-production deals, often with international partners, a move which brings fears about the loss of distinctive national content in the UK TV market.

Subscriber Estimates

By April 2013 Netflix had 2.3m UK customers, a figure that was forecast to hit 9.78m subscribers by the end of December 2018, passing Sky’s 9.64m satellite households for the first time. This is in comparison to Amazon Prime Video’s subscriber numbers in the UK, which sit at around 4m. This was a milestone in the UK TV market, with total subscriptions to OTT streaming services (Netflix, Prime Video and Now TV) surpassing the number of subscribers to pay-TV packages for the first time. However, it seems that Netflix subscriptions are being taken out in addition to existing cable/satellite subscriptions, rather than replacing them. For example, Sky has seen its subscription TV numbers remain fairly stable, while at the same time increasing subscribers to Now TV, which had grown to around 1.5m by 2018. Meanwhile, in 2017 74% of subscribers to online TV services like Netflix also had a pay-TV subscription (Ofcom 2017: 38).